In this essay, Vice Chancellor Strine reflects on the common interests of those who manage and those who labor for American corporations. The first part of the essay examines aspects of the current corporate governance and economic environment that are putting management and labor under pressure. The concluding section of the essay identifies possible corporate governance initiatives that might–by better focusing stockholder activism in particular and corporate governance more generally on long-term, rather than short-term, corporate performance–generate a more rational system of accountability, that focuses on the durable creation by corporations of wealth through fundamentally sound, long-term business plans.

The full essay is available for download here. The essay will be appearing in the Journal of Corporation Law with responses by a number of prominent commentators. In a subsequent post, Guest Contributor Hillary Sale will offer some background on that issue of the Journal and the responses to the Vice Chancellor’s remarks.

Mark Morton: In the typical M&A deal, there’s generally a match right. As a result, the target can’t actually terminate the merger agreement for the superior proposal until the first bidder decides whether or not to match. If the first bidder matches, he wins (unless he’s topped again). In that case, the target will not have signed a merger agreement with the interloper, so the interloper doesn’t get a termination fee. As a result, the interloper gets nothing for his superior bid–other than a large chunk of unreimbursed expenses. I would argue, therefore, that the presence of a match right creates a significant disincentive to topping bids.

The Ryan and Topps decisions represent an interesting nuance in the debate over competition among states with respect to corporate law. Although that scholarship emphasizes where firms will choose to incorporate, there may be competition among courts over shareholder derivative suits as some plaintiffs file in Delaware and others in different jurisdictions (such as the venue where the company’s headquarters is located). If some plaintiffs file suit outside of Delaware courts–believing, perhaps, that a foreign state’s court will apply Delaware law in a manner more favorable to shareholders–which court takes control of the case will be particularly important. And, of course, the fact that dueling suits are proceeding side by side raises a host of interesting issues, including whether the courts or the parties will “race” to an outcome to gain collateral estoppel effect and whether having two costly suits proceeding simultaneously is an efficient use of judicial resources.

Publicly traded companies distribute cash to shareholders primarily in two ways–either through dividends or through anonymous repurchases of the company’s own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors. To increase transparency and reduce opportunities for exploitative behavior, the SEC required that companies disclose their repurchase activity for the past quarter in the 10-Q and 10-K filings beginning in January 2004. This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

Commentary is especially welcome on this fascinating new piece. The full article can be downloaded here.

Editor’s Note: This post is by Lynn A. Stout of the UCLA School of Law.

Last month I published this op-ed in the Financial Times questioning whether the push for greater “shareholder democracy” may end up harming public investors by driving companies into the arms of private equity firms. After assessing the substantial increase in private equity activity in recent years, the piece concludes:

There is reason to suspect that the modern trend towards greater “shareholder power” has gone too far and is beginning to harm the very shareholders it was designed to protect. A certain level of investor protection and power is, of course, essential to an honest and healthy public market. But you can have too much of a good thing. The buyout trend suggests we may already have too much “shareholder democracy”–at least, too much for shareholders’ own good.